If you were asked to make an investment in which you were told you would never see your money again, how much would you invest?

If you put money in a savings account each month, and the bank guaranteed you that you could never withdraw the money again, would you keep depositing checks?

If your savings account was only available to keep your bank from losing money, but you could still lose money, would you keep money in that savings account to protect your banker?

If you put money in an account that was guaranteed to never pay you more than 0% interest, would you want to save your money in that account?

What if the money in the 0% account could lose money, even if it couldn’t gain money?  How much would you put there?

What are these horrible accounts I am talking about?

Did you guess Home equity?

Think about it -

• When you make a big down payment on a house, you don’t get paid money each month by the bank for that, do you?
• When you send in extra principal payments, does the banker pay you interest?
• If your home loses value, does the bank lower your mortgage balance, or does your ‘Home equity Savings Account’ disappear?
• If you have a lot of equity, does that make your house go up in value?

Down Payments, Home equity and mortgage repayment or early payments are all questions regarding where you should store your wealth over the long term.  Equity in your house doesn’t make you safer or wealthier – it just sits there.

Big down payments are safe for the banker – not you!

Of course, you pay interest on money you borrow, but that is a choice – you can pay interest, and store your money elsewhere, or not pay interest, and maybe keep the bank from losing money.

Make sure your mortgage provider asks a lot of questions about down payment amounts and home equity before you structure your mortgage.

If you already are in a mortgage, get an annual checkup to make sure your mortgage is helping you to succeed financially, rather than helping the bank succeed.

If your mortgage is owned by Fannie Mae or Freddie Mac.  For most people, they have no idea who owns their mortgage – all they know is the servicer.  The Servicer of your mortgage is the bank that you send your check to each month.  They collect the escrow payments, chase down late payments, and send the owner of the mortgage their check each month.  Fannie Mae and Freddie Mac own most conventional mortgages in the US.  (Over $6 Trillion worth).

The Federal Housing Finance Agency has extended the government’s Home Affordable Refinance Program by 12 months.

HARP’s new end date is June 30, 2011.

Originally known as Making Home Affordable, HARP aims to help North Carolina homeowners refinance their mortgage who may otherwise be ineligible because of falling home values.

There are 4 basic HARP criteria every borrower must meet:

1. The existing home loan must be guaranteed by Fannie Mae or Freddie Mac.
2. Your home must be a 1- to 4-unit property
3. You must have a perfect mortgage payment history going back 12 months. No 30-day lates allowed.
4. Your first mortgage balance must be 125% or less of your home’s market value

If you’re not sure whether Fannie Mae or Freddie Mac back your mortgage, you can look it up. Fannie’s website is http://www.fanniemae.com/loanlookup; Freddie’s is http://freddiemac.com/mymortgage.  If you don’t locate your loan on either website, your mortgage is backed by a third-party and is not HARP-eligible.

For homeowners that meet HARP’s criteria, there are some underwriting details of which to be aware.

First, if your original mortgage does not require mortgage insurance, your HARP mortgage will not require it, either — regardless of your new loan-to-value.

Second, all HARP refinances require income verification. It doesn’t matter if your original mortgage was a stated income or no income verification loan. You should expect to produce 1040s and W-2s for your HARP refinance and asset statements, too.

And, lastly, second (and third) mortgages may not be “rolled in” to a new first mortgage loan balance. Junior lien holders must agree to remain in a junior lien position, regardless of combined loan-to-value.

There is a thorough HARP FAQ section on the government’s website, but it’s for general questions only. For specific Home Affordable Refinance Program information, first make sure you’re program-eligible, then pick up the phone to call your loan officer.

While this program hasn’t been too successful nationally, we have helped many, many homeowners in the Charlotte area over the past year with this program.  If the resources listed in the post aren’t enough to get you started, feel free to give us a call for more answers.

WARNING: This a graphic story of the financial destruction of an otherwise financially successful man.

Here’s a secret for you – your credit score will go down every time you do something that people did previously just prior to defaulting on their debts.  The credit scoring model is trying to predict the likelihood of you going 90 days or more late on an account.  If someone ever defaults on a debt, they leave clues well in advance of that default.

Here is the pattern of clues John left as he trashed his credit following a medical incident that left him out of work for a few months:

1. John needed some cash, so he applied for new credit.
2. Having a lot of equity in his house, John applied for a home equity line, but the application was denied since he wasn’t working.
3. With the financial pressure of medical bills and no income, John could no longer pay off his cards in full each month.  The amount owed starts to increase close to the limit on the cards.
4. Needing cash, he turned to alternative sources, getting a signature loan at a high interest rate.
5. He was late on a few credit card payments as the money just wasn’t there to make the payments on time and he was juggling the many open accounts.
6. Creditors turned over John’s accounts to collection agencies, who immediately notified the credit bureaus of the collections.  Collection agencies wanted to lower his credit score to prevent him from opening new accounts, leaving him with a greater chance of paying the collection agency off.
7. (Trying to sell his house didn’t help as the market was slow and declining, so his equity was disappearing).
8. John first went to a credit counseling firm and then eventually filed for bankruptcy.
9. Some debts were wiped out in the bankruptcy, and he just quit making payments on the remaining debts, feeling the situation was hopeless.
10. Creditors file suit and judgments get reported to his credit report.
11. Being unable to manage then debt load, he is late paying his taxes and a tax lien is filed in court against him.
12. Unable to even make his mortgage payment with the high costs of his other bills, the house is lost in foreclosure and all the equity in the house disappears in the soft real estate market.

John’s credit destruction was now complete after just a few tragic months.  The impact will last for years, as most of these items will impact his score and stay on his credit report for seven to ten years.

While this story is a myth, the events and results happen to good people every day.

Following the StartwiththeHouse.com strategy would have helped:

1. Always have an emergency fund – this would have tied John over during the short period when he wasn’t working.
2. Keep credit cards and other loan payments very low
3. Have proper insurance against all the threats out there – not just uninsured motorists, but illness, sickness, death or lawsuits as well.
4. Store your cash where is can be accessed.  In the above story, John had over $200,000 of equity in his house – but with no job, he couldn’t access it and lost his house in addition to destroying his credit.

Your mortgage can’t be just a loan to be hated – today it has to be an integral part of your overall financial plan to help you succeed financially.  Could you survive two months without work with the increased expenses of a health issue?  If not, what are you doing to make sure you have a different outcome?

Mortgage markets improved last week on domestic jobs data and international banking concerns. The news triggered buying in the bond market and, as a result, conventional, FHA and VA mortgage rates in North Carolina improved for the 4th consecutive week.

Mortgage rates are now at a 6-week low but probably shouldn’t be.  It underscores just how important global events can be to U.S. mortgage markets.

For example, corporate earnings continue to improve and key elements of the economy are strengthening.  Even the Federal Reserve acknowledges this.  In most circumstances, that would be a boon for the stock markets and bond markets would suffer, including mortgage bonds.

Last week, that wasn’t the case.

Early in the week, as (1) China tightened its monetary policy, (2) Greece did little to quell lingering default fears, and (3) Spain raised its deficit forecasts, global investors sought to reduce their collective risk exposure. For safety of principal, many sold some of their more aggressive positions and moved the cash proceeds into the U.S. bond market — which includes mortgage bonds.

On Wall Street, this type of trading pattern is called a “flight-to-quality”.  Because mortgage bonds are backed by U.S. government entities, the debt is considered to be ultra-safe.  Last week’s extra demand for bonds helped to push prices up and mortgage rates down.

And that was before Friday’s weak jobs report. Although the Unemployment Rate fell to 9.7%, the government reported a net loss of 98,000 jobs last month and this, too, helped mortgage rates tick lower.

This week, we’ll hope for momentum to continue.

There’s very little domestic news to move rates this week so keep an eye on the global market for similar stories like what we saw last week.  Or, if you’re not sure what to look for, just give me a call or send me an email and I’ll be happy to watch the markets and mortgage rates for you.

Know what you are working with!

If you haven’t seen your credit report in a while, get a copy now.  There is only one place for a truly ‘Free’ report – but it comes with a catch – www.AnnualCreditReport.com will give you a copy, but the catch is you have to pay for your score.  At this point, you don’t really need the score, but you can pay the extra money if you want to.

Other services (with catchy radio jingles) offer free reports, then try to sell you their service.  Use with caution.

When you get your report, you need to decide if you are in one of two camps:

1. I don’t have enough credit and need more credit history
2. I have very established credit history, and too much credit.

Your credit score will usually reflect the categories above – if you are below a 720-740 range, you need more or better credit history.  If you are above a 750, your score won’t improve further with more credit accounts, in fact, you probably have too many accounts to keep your score from getting even higher.

Credit scores range from 350-850

The lowest I’ve ever seen is in the 400′s, and I routinely see credit scores in the 800-810 range.  Above 820 is just luck.

What Score do you need?

• To buy a house with an FHA loan: 620 (Although the FHA says 580 officially)
• To buy a car:  700
• For a Jumbo Mortgage:  680-720
• Best rates on a Conforming mortgages: 740

Above a 740, credit scores are really just bragging rights, but the higher the score is, the more buffer you have in case something happens to your score. If you have an 810, for example, and a credit card payment gets lost in the mail, the late score won’t affect your home mortgage rate. However, if you have a 741, and then make a late payment, you will drop below 740, and then your mortgage rate would be higher.

Step One:

After getting a copy of your credit report – count the number of active “tradelines”, or active accounts that are on your report.

• More than 4 tradelines:  We’ll probably close some of them down.
• 4 or fewer tradelines: You will want to get some new credit.

Check back in a few days after you get your credit report copy and we’ll talk specific strategies for both groups.

1.       Do you pay your bills on time? The answer to this question is very important. If you have paid bills late, have had an account referred to a collection agency, or have ever declared bankruptcy, this history will show up in your credit report.

2.       What is your outstanding debt? If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score.

• Keeping your credit cards balances at 20-30% of their limit is the fastest way to increase your credit score.

3.       How long is your credit history? A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.

• Parents, help your children establish good credit habits – not using credit at all will hurt them as they get older and want to buy a house, so help them get credit when they turn 18, and then make sure they treat it with respect.

4.       Have you applied for new credit recently? If you have applied for too many new accounts recently that may negatively affect your score.

• The 10% you saved at a department store last month by opening a new account can lower your score.  If your score lowers just prior to buying a house or getting an auto loan, that 10% store savings is nothing compared to the cost of a lower credit score.

5.       How many and what types of credit accounts do you have? Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans and credit cards may improve your score.

• When I see credit scores above 800, the owner of that score will never have more than two credit cards, one mortgage, and maybe a car loan.  To get an 800 credit score, you need to have used credit in the past, but now only use 1 credit card, pay if off every month, and close all the accounts you don’t use.
• Closing accounts is normally bas for your credit.  If you have a score below 720, this is usually true.  When you get a score above 750, closing old accounts will further increase your score.

Keeping your credit score above 740 is necessary in today’s economy. People with lower credit scores will pay more for home loans, car loans, cell phones, and it can even effect employment hiring, auto insurance and home owner’s insurance rates.

So, you have a mortgage with PMI, or Private Mortgage Insurance.  How can you get rid of it?  There are a few ways, and you find, you are actually better off paying PMI than the alternatives.

In general, if you have a mortgage loan with PMI, you have to pay it until you get to 20%-22% equity in your house.  A few years ago, it was simply a matter of buying a house, waiting two years, and then getting an updated appraisal to have your mortgage servicer drop the PMI.  Not so simple anymore.

For FHA loans, you will have to carry PMI for a minimum of 5 years after you get your loan.  When the loan balance gets to 78% of the original sales price or appraised value, the PMI will automatically drop off.  If you paid extra principal payments on your mortgage and got to 78%, and at least five years have elapsed since you closed on the home loan, you can call your servicer, and they will remove the PMI charge.

For Conventional Mortgage loans, you only need the PMI for two years, but the loan servicer will not drop the PMI until you ask.

It used to be that you could get an appraisal done on your house and use the appreciation to cancel the PMI.  Most lenders changed that rule a few years ago as the credit crisis hit, so on conventional mortgages, it is similar to the FHA program – pay your loan down and then the PMI can be removed.

Three other options if you have PMI both involve refinancing your current mortgage.

1. If your house is still valued higher than you paid for it, you may be able to get a fresh appraisal and a new loan at 80% or less than the appraised value.  This new mortgage will not have PMI.
2. If you have 10-15% equity in your house, you may be able to refinance with a new mortgage combo – get an 80% mortgage and add on an equity line to cover the amount above 80% of your home’s value.  Equity lines can be really tough to get, but there are still a few lenders that offer them.
3. If you originally made a small down payment, say 0-5%, and now have more equity in your house, a refinancing to a new mortgage with more equity in your house will allow you to pay a lower PMI premium.  Combine the lower PMI premium with today’s lower interest rates, and this option may still save you money over time compared to your original PMI cost.

For the most part, people hate PMI.  However, don’t forget that PMI allows many people to buy a house and improve their quality of life years sooner than if they had to pay rent while saving for a 20% downpayment.  If you had to get PMI, dont’ regret that – just be aware of what you need to do to get rid of PMI.

If you need an updated amortization schedule, contact us, and we will create one for you free of charge.

Since May 1st, 2009, all mortgage loans that were sold to Fannie Mae or Freddie Mac, the government run mortgage giants, have had to comply with a new regulation, the HVCC, or Home Valuation Code of Conduct.  This regulation is leading to an unintended consequence of declining home values.

The regulation, along with lender’s underwriting standards, is causing many home owners and home buyers to get much lower appraised values than they expected.

Key changes with appraisals over the past year.  In general:

• Appraisers have to be selected from a blind pool by an appraisal management company(AMC). Loan officers are no longer allowed to talk with appraisers. (IS this a violation of my First Amendment rights??)
• AMC’s are often using inexperienced appraisers that may or may not have knowledge of a local market. Since all real estate is local, an appraiser from 50 miles or more away from the house has the potential to make more mistakes or mis-value the house.
• Appraisers can only use sales that closed in the last 90 days. In slower markets, or slow market segments, such as higher priced homes, no or few sales are making it very difficult to establish comparable sales.  Appraisers are only using the existing sales, so ‘un-comparable’ houses are used as comps.
• The cost of implementing HVCC has increased closing costs by anywhere from $100-$200 per closing.
• The Homeowner, buyer or seller has no recourse if the appraisal comes back with an unreasonably low value.

The irony of this regulation is that this process started when the NY Attorney General filed a lawsuit against now defunct Countrywide Home Loans and their AMC, Landsafe.  The NY AG charged that the AMC / Lender relationship was hurting consumers and causing inaccurate appraised values.  By the time the complaint was settled with the new HVCC,  lenders have to use an AMC and the AMC’s are growing and are making the big bucks – charging lenders more, and paying the appraisers less.

Additionally, with the AMC involved, turn times are slower, so it takes longer for borrowers to close their loans.  These longer turn times also increase costs as interest rates often have to be locked in for longer periods of time.  Imagine that – AMC’s get sued, and the result is that their business and profitability grows while the consumers (the original victims) are paying more money for lower quality.

Bottom line:  Home buyers and home owners that are refinancing are paying more money for an appraisal that is not always an accurate reflection of the real value.  This is keeping sales from happening at prices that both the seller and buyer agreed to, and keeping homeowners from being able to refinance their loans to lower interest rates.

What can you do about it? Not much, unfortunately.  Unless Fannie Mae and Freddie Mac choose to repeal the HVCC, home owners will be stuck with lower values, higher costs, and often times inaccurate appraisals.

In this case, the cry for regulations to protect consumers from bad appraisals has led to higher costs, slower response times, and an inferior appraisal report than the old system provided.

What is it going to take to improve rates on jumbo mortgages in Charlotte? You may be surprised to know that the solution isn’t really in the hands of banks or the Federal Reserve. It depends on how these mortgages are securitized and on Bond Investors appetite for risk / returns.

Today, 95% of mortgages are guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Since jumbos don’t conform to these agencies’ criteria, they expose investors to more risk.

This has dampened the market for jumbo mortgages, which means lenders must lend their own money and then keep the loan on their own balance sheet. To avoid tying up capital that could be used to make more mortgages, lenders are creating more stringent lending guidelines and restricts how many loans they will approve.  (Funny how things change when it is their money, and they can’t jsut transfer the risk to someone else!)

If lenders could package and sell more jumbo mortgages as securities, we would see better rates, and borrowers would benefit. What would it take to make this happen?

The flaw in jumbo securitization now
Currently, a pool of, say, $100 million of jumbo mortgages may be split into $95 million of highly-rated (and theoretically low-risk) AAA bonds and $5 million worth of subordinate bonds that act as credit support for the AAAs. If any of the underlying mortgages default, the subordinate bonds absorb the losses before the AAAs lose a penny.

This structure opened a whole new universe for investors who were limited by regulation or investment charters to buying only AAA-rated securities, while allowing investors with more risk appetite to buy the higher-yielding subordinate bonds. The banking, mortgage, and housing industries were transformed by the enormous new source of capital achieved with very high efficiency. But there was a fly in the ointment.

Securitization agreements attempt to consider all the possible environments a security is likely to encounter, and spell out exactly what happens under those circumstances. However, they’re typically based on what happened in the past, and historical extremes may be omitted on the assumption that “things are different now.” As a result, they struggled to adapt when confronted with the “100-year floods” we’ve experienced lately — conditions that were unimaginable to the sellers.

Is there a better way?
An ideal method of efficiently attracting capital to fund jumbo mortgages would:

• Separate the various risk levels of a mortgage’s capital structure, so those parts can be sold to buyers who will pay the best price
• Be able to adapt to changing credit environments
• Allow the seller (The bank that did the loan originally) to retain a reasonable amount of the risk (to align their interests with the buyer’s) but also clearly pass control of the loans to the buyer

(This last point is more important than it may sound. Under new accounting rules, a seller who retains too much control over, or risk from, a securitization is required to consolidate the transaction back on its balance sheet. Unfortunately, this will make lenders more wary of securitizing jumbo loans.)

One possible solution might be a jumbo securitization structure that combines standard AAA bonds with credit enhancement modeled on that of mortgage insurance companies or some REITs, which have been able to actively manage their exposure, adjust their policies, and use earnings from new business to help replenish capital as conditions warrant. The result could be something even more liquid and more sustainable than traditional securitizations.

For now at least, the supply of jumbo mortgages seems to be lower than demand. But that could change in 2010 if stabilization of home prices leads to more jumbo lending.

Another thing to look for is lower demand for conventional loans – if fewer FNMA conforming bonds were being offered, yield-hungry investors might look into nonconforming mortgage securities.  more buyers of non-conforming securities would bid up the prices, resulting in lower yields and lower interest rates to home buyers.

What can you do right now?

If you need a Jumbo Mortgage (Above $417,000), you do have a few options:

• Combine a First and Second Mortgage to get the amount of money you need.  You will still need 10-15% equity in the house.
• Put down more money  – borrowers with more equity are effectively sharing the risk with the lender, so bigger down payments can really reduce interest rates.
• Have the Seller pay Point to ‘Buy down the Rate’.  Most lenders allow the Seller to pay up to 6 Points (6% of the loan amount) toward the buyers’ closing costs.  By using several points to pre-pay the interest, you can get a Jumbo loan with a lower rate than a conforming loan.  Ask your mortgage professional to explain more about this strategy, or give me a call to find out more.

Yesterday I published a list of things to do in 2010.  Today, I’m adding a few more comments to the remaining things to do.Here is a list of ten things you should consider doing in 2010 to get on better footing financially this year:

1. Build an Emergency Fund
2. Pay off any debts that aren’t increasing your wealth
3. Make sure you have the right insurances in place
4. Re-balance all your assets – make sure your money is where you want it to be
5. Review your mortgage
6. Buy an Investment Property or Help Someone buy their first home
7. Increase your 401k or IRA savings
8. Save for your kids College Education
9. Buy the home you really want (Prior to April 30th)
10. Buy your retirement home now, and then rent it until you need it.

4.  Re-balance all your assets:  For many Financial Advisors, they look at your stock, bond and mutual fund holdings annually or quarterly to re-balance everything.  Make sure you look at all your asset classes – including Equity in your house, and Cash Value in a life Insurance policy.  Read more about how quickly equity in your house can disappear and consider how much of your wealth you want to put in this asset class.

5. Review your mortgage.  Just like you would never buy a mutual fund and ignore it for 30 years, don’t expect your mortgage to be perfect for 30 years, either.  A mortgage checkup doesn’t mean you will refinance – it simply means that you will know if your current mortgage is the best loan for you.  This is more than just interest rates – it involves loan type, house equity, identity theft risk assessment, and minimizing your overall interest costs.

6. Buy an investment Property or Help someone else buy their first home.  With the low prices, tax credits, and low interest rates, an investment property may be a great way to diversify your assets, increase your net worth, and provide safe, affordable housing to your renter while they help you save on taxes, save more money, and increase your wealth.  If you don’t want to become a landlord, higher a rental management company to do it.

With the $8,000 first time home buyer tax credit, it’s a great time to help a family member with a gift of their down payment so they can buy their first house.

7.  Did you maximize your 401k or IRA contributions in 2009?  If not, increase your 401k with-holdings or set up an automatic IRA deposit plan to make that happen in 2010.  Many people don’t like that their 401k turned into a 201k in 2008, but it may be your only way to retire comfortably – don’t prepare yourself for the regrets of not doing what you can, even if 401ks / IRA’s aren’t perfect.

8.  Save for you kids college education.  In North Carolina, your 529 plan contributions can be free of state income taxes and anyone can contribute – give your kids’ relatives a chance to make a difference in your children’s lives by setting up a 529 plan and letting them know they can contribute.

9.  Buy the home you really want prior to April 30th.  If where you are isn’t where you want to be, when would be the best time to move?  Right now, actually.  With the low interest rates, $6500 home buyer tax credit, and low prices, this may be the perfect year to get into your dream home.

10.  Buy your retirement home now, then rent it until you need it.  Question:  Will Oceanfront property be cheaper or more expensive in 1, 20 or 30 years?  If you buy now, get a 30 year fixed mortgage, you will have more equity in the house from loan re-payment, and may even be able to have your retirement house paid for before you retire.  If you plan on renting the house in the interim, every trip to your retirement destination could be a tax deductible business trip while you are still working.